In another case a young couple asked me what to do about their little problem. They bought their first home three years ago at the top of the market. They were not over-extended, had perfect credit and bought a home well within their means. Now that home is worth $90,000 less than their mortgage. Their bank is one of the very giants that got double-digit billions in bailout funds. I'll just refer to as “Giant Ass National Bank, here. The bank had financed the entire purchase price for this young couple.
Suddenly one of them was laid off from his job. So, being responsible young people, they contacted Giant Ass National Bank and asked if the bank could rejigger their mortgage so they would not default and to better reflect current market valuations. Though the young couple had never even been late on payment, Giant Ass National Bank treated them like a couple of deadbeats and showed them door.
Which led me to give them some extraordinary advice:
"Go back to them and tell your bank something like this:
When we came in a few weeks ago I think you misunderstand what we were trying to do. You thought we wanted to discuss our problem. But in fact, we wanted to discuss your problem.
You see, we have zero equity in this house, a house now worth at least $90,000 less than you lent on it. We were willing to offer you a helping hand by maybe splitting the difference with you and renegotiating a new 30-year mortgage. But you turned us away..So, since you didn't think that was a good idea, we are back to put it to you as starkly, and unambiguously as possible. Let us ask first, Mr. Big Ass Bank loan officer, would you pay 300,000 for a house currently appraised at just under $210,000? Hm? Would you?
Well, neither would we. And, more to the point, neither will we.
So, either share some of that federal bailout money with us, by reducing our principle and interest rate, or we're simply going to hand you the keys at the end of next month. At which time Big Ass Bank will not only lose our banking business and our true-blue, on time monthly payments, and you'll be the ones stuck with the full $90,000 loss in value. Oh, and on top of all that, Big Ass Bank will incur the tens of thousands of dollars in costs associated REOs, the foreclosure process, property maintenance fees and auction/real estate commissions.
I hope we've made ourselves clear this time. Your call. Oh, and think fast, because thirty days from now we'll either have a new loan, or you'll own cookie cutter house in a neighborhood full of cookie cutter houses, several of which are already bank-owned and on the market.
My point to them, and anyone in their situation, is that the only way ordinary Americans are going to see a dime of the benefits from the bank bailout billions (soon to be trillions) is if they stand up and demand those benefits. To do that borrowers who, under normal economic conditions would show deference, even fear, when dealing with their bank, need to be ready, willing and able to play hardball instead. Banks have shown that they are not about to renegotiate loans in ways that force them to accept a loss -- that is unless it's in their interest to do so, unless the alternative is worst.
I guess in kinder and gentler times what I am suggesting might be considered a form of "extortion." But under these conditions it's nothing personal, just business -- good business for consumers. After all, until the tables turn, lenders will remain the only extortionists in this game -- as in; “Pay your mortgage on time or we'll take your home away from you.”
All I'm saying is, under some circumstance, like the young couple described above, the right response can often be, “Go ahead Big Ass Bank, make our day.”
I don't mean to imply that every borrower is in a position to play this kind of high-stakes hardball. Those who went hog wild during the easy money decade are toast. They have no bargaining chips. And, frankly, they deserved whatever misery their spendthrift self indulgences earned them.
I'm talking to those borrowers who played by the rules, like the young couple who, through no fault of their own, suddenly find themselves owing Giant Ass banks more than the underlying security is now worth. Nothing about this current mess is their fault. They are the quintessential innocent bystanders.
No, it's not their fault, it's the fault of greedy lenders, seeking high fees and low risks who caused the real estate bubble, and it's consequences. So it is they who should be forced to shoulder the bulk of the burdens they created. Nevertheless they were given the very kind of breaks they now deny so many worthy borrowers. Not only were they allowed to stay in their homes (their corporate suites) but they were handed nearly a trillion taxpayer dollars of free money so they'd have the liquidity necessary to help borrowers out.